Conversion of Loan into Equity Share Capital

First of all we have to check, whether the agreement of Unsecured loan with
shareholder has given such clause of conversion of unsecured loan in to share capital.
If agreement does not have such clause then you can’t convert unsecured loan amount
in to share capital automatically.

As per provisions of Section 62 of Companies Act, 2013, following are the Conditions
for conversion of Loan into Equity:-
i. Term of conversion to be attached to issue letter of Debenture or Loan
ii. Approval of shareholders by passing of special resolution in general meeting
obtained at the time of issue of debenture or loan (i.e. prior approval in GM by SR)
iii. Filing of MGT-14 within 30 days of passing of Special Resolution (Section 117)

Further:

“If a Company has accepted loan before 1st April, 2014 (i. e under Companies Act,
1956) and wants to convert such loan into equity shares at present. Whether it is
allowed?
a. As per the provision under Companies Act, 1956 there was no requirement to pass
prior Special resolution for conversion.
b. As per provision of Companies Act, 2013 it is mandatory that company had passed
special resolution at the time of acceptance of loan / debenture.
Therefore, if a Company wants to convert the loan accepted in Companies Act, 1956
and no Special resolution passed at that time for conversion of such loan in future then
Company can’t convert such loan due to Section 62(3).”

So, If Loan taken after 2014 with necessary documents and Special Resolution
with term of conversion to be attached to issue letter of Debenture or Loan in
future then follow process of conversion of loan into equity:
W.e.f. 1st April, 2014 if a Company wants to convert its Loan or Debentures into equity share capital
then it’s have to follow the below mentioned process:

STAGE – I: Steps Before Issue of Debenture or Acceptance of Loan

STEP- I- Holding of Board Meeting

I. To pass an resolution for Acceptance of Loan or issue of debenture

II. To pass board Resolution for conversion of such Loan / Debenture into Equity share Capital of the
Company

III. To issue Notice for holding of Extra Ordinary General Meeting of Shareholders.

STEP- II- Holding of Extra Ordinary General Meeting:

IV. Company shall pass Special resolution for conversion of such loan/ Debenture into Equity share capital
of Company in Future.

V. File e-form MGT-14 within 30 days of passing of Special Resolution with ROC.

STEP- III- Enter into Agreement:

VI. Company shall enter into an agreement of Terms of Loan or Debenture.

VII. Such Agreement should contain the term of conversion of such Loan or Debenture into Equity share
capital of Company in Future.

STAGE – II: Steps at the time of conversion of Debenture / Loan into share capital:

STEP- IV- Holding of Board Meeting

VIII. Pass Board Resolution for Allotment of Equity Shares

IX. Preparation of List of Allottees

X. Filing of e-form PAS-3 for allotment of Shares within 30 days of passing of Board Resolution